December 22, 2008

U.S. Auto Industry Bailout

I am totally opposed to the current government bailout of U.S. automakers. I’m against it because the government is not forcing these manufacturers to make any meaningful changes. A lot of the media coverage centers around the labor costs, design, and even healthcare issues but not enough attention is being placed on the real problem. The real problem is that U.S. automakers are asking customers to make a very bad choice. The problem stems from decades of mismanagement around business and marketing strategy – or lack of it. Bean counters and financial types have run U.S. automakers into the ground. Now, we’re hoping that bean counters will rescue the automakers?

They say “if GM fails, the economy will go down with it.” Really? I don’t buy it for a second. I’d only believe the argument if there was a persuasive case made for how the current bailout will ensure that GM won’t fail in the future. But, I haven’t heard any compelling argument other than some sweeping generalizations loaded with threats of doom. I have a feeling that we’re head down the road of government subsidizing the U.S. auto industry or prolonging the inevitable Chapter 11 anyway. If it’s Chapter 11, we’re basically burning money. If it’s subsidized, I can’t envision a future where the companies are incented to become competitive – so, money is being wasted in this scenario, as well.

I suppose there could be a patriotic element working here. But, I don’t buy into that notion either. Many of the foreign car makers manufacture here in the U.S. Americans make Toyotas. Americans sell Toyotas. And, Americans buy Toyotas. The days of blindly defending GM, Ford, and Chrysler in the name of patriotism are over. We still have baseball so let’s get over it.

I don’t believe a Chapter 11 filing will do anything. Sure, bankruptcy will lead to more bean counters messing around with the cost structure. Bankruptcy will also allow the management from wiggling out of their contractual obligations to the union. But, if management does not squarely face their real problem, a true solution will never be pursued. What is this real problem? Let’s turn our attention to … VALUE.

U.S. automakers have a bad product. It’s not just an uninspiring design problem. It’s not just a manufacturing cost problem. It’s not just a glut of distributors problem. It’s not just a bloated dealer incentive problem. It’s not just a “legacy” cost problem with retired employees sucking out too much money from the companies. It’s not just a customer perception problem around poor quality. It’s all of these things but it’s so much more. It’s a lack of value problem.

You can cut out all kinds of cost but it won’t solve anything until you figure out how to sell more cars at a profit. And, selling more cars is a marketing problem. Let’s bring this home by getting specific.

You do not want to buy a new car from GM (Cadillac is an exception, though), Ford, or Chrysler because it would be a stupid decision. Buying a used American car is not stupid. New American cars have horrible resale values. A car typically retains about 35+ percent of its retail value after five years. Mini Coopers actually hold over 50 percent. On the other hand, Kia’s Sedona holds 20 percent of its value. American cars hover around 22-25 percent. GM’s Cadillac brand actually has a pretty good resale value.

Now, you could live with a poor resale value if the car’s retail price is much lower than a comparable foreign car. But, it’s not that much cheaper anymore. If you compare a mid-sized Ford sedan with the same class vehicle from Toyota or Honda, the Ford will be a little cheaper. But, Ford already has a perception as a cheaper product so the net effect in a buyer’s mind is nil. So, the buyer thinks about value.

As for value, the Toyota will be worth more than the Ford five years from now. You’re going to buy the Toyota – not because of “legacy” cost structures or dealer saturation or union employee health care or whatever else the media is pigeon holing on. You’re going to buy the Toyota because it is a better value. The Toyota is pretty good looking. They don’t have the poor quality stigma. Toyota dealerships are nice and salespeople treat you like a VIP. Your middle-class and upper-class neighbors drive a Toyota or Lexus (Toyota’s luxury brand). You pay a little more but get so much back. Value. Consumers may have short attention spans but they are not idiots.

American car companies have treated consumers as morons far too long by practicing (for decades) a supply-side marketing scheme that has simply blown up in their face. Now, they are paying for it. Oh, wait. No. Now, we (tax paying CONSUMERS) are paying for it! How ludicrous is this?

I half jokingly said on Facebook that the way for U.S. automakers to dig themselves out of their hole is to sell less cars. And, I was only HALF joking. It was a joke because GM actually loses money for every car it sells. Great business model, right? More seriously, they really need to produce less cars. Believe it or not, they can produce less cars and still sell more. Years of saturating the rental and fleet markets with unwanted cars led to a glut which, in turn, led to poor resale values. Short-term thinking got them into this trouble. The dealer incentives that were 3x that of the Japanese automakers didn’t help.

That’s it. There’s my solution. Please do all that other stuff. Renegotiate the UAW contracts. Bring wages down a tad to be more competitive with what Toyota’s line workers make. Sell the corporate jets. Eliminate the overlapping distributors. Hire better car designers. Continue to make improvements in the supply chain and inject money into Six Sigma manufacturing. But, PLEASE, stop doing stupid things like producing 10 cars when you know only 2 will be sold … especially if you are losing money for every car that is sold. If you make it, they still won’t come!

The only way automakers can crawl out of this mess is to implement ways to increase resale value, continue to make better cars, and go through an image makeover. Throw the supply-centric plans out the window and try following demand-centric ideas. And, oh yeah, streamline your brands.